Custom Truck One Source, Inc. 2026 Q3 Earnings Call

Thank you, operator, and good morning. Before we begin, we would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factor section of the company's filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release we issued yesterday after the market close. That press release and our third quarter investor presentation are posted on the investor relations section of our website. Yesterday afternoon, we also filed our third quarter 2026 10-Q with the SEC.

Today's discussion of our results of operations for Custom Truck One Source, Inc., or Custom Truck, is presented on a historical basis as of or for the three months ended September 30, 2026, and prior periods. Joining me today are Ryan McMonagle, CEO, and Chris Eperjesy, CFO. I will now turn the call over to Ryan.

Thanks, Brian, and good morning, everyone. Custom Truck delivered another strong quarter, led by record performance in our rental business. Third-quarter adjusted EBITDA was $111 million, up 16% year-over-year, and adjusted EBITDA is up 24% through the first nine months. SER segment revenue was up 18%, and STEM segment revenue was up 8% year-over-year. Consolidated revenue finished at $495 million, up 3%. On the strength of these results, we are raising our full-year adjusted EBITDA guidance for the third time this year. SER continues to deliver consistently strong performance, driven by record demand in the transmission and distribution, or T&D, markets. Our rental fleet averaged 81.5% utilization during the third quarter, up 220 basis points from Q3 of last year. This was supported by record levels of OEC on rent, which averaged just under $1.4 billion in Q3, up more than 10% year-over-year.

So far in 4Q, both measures have remained quite strong, with OEC on rent currently greater than $1.5 billion and utilization surpassing 84%. As I said last quarter, we believe that we are in the early stages of what could be a once-in-a-generation transmission demand super cycle, which our SER third-quarter results support. We ended the third quarter with total OEC of over $1.76 billion, up almost $86 million in the quarter and the highest quarter end level in our history. The continued investment in our rental fleet reflects sustained record-level demand and supports our expected continued growth in SER for the remainder of the year and into 2027.

Given the additional growth CapEx in our fleet year to date, our average fleet age is just under three years old, which we continue to believe is one of the youngest fleets in the industry and positions us well to support our customers' needs across the country. I want to spend a minute on capital allocation because it was the most important decision we made this quarter. Demand from our transmission customers, much of it tied to long-duration projects, has continued to build beyond what our original fleet plan assumed. We chose to meet that demand. We are raising our 2026 net rental fleet investment to $210 million-$230 million, with the incremental dollars going into long-term transmission rentals and high-return specialty products. We directed STEM production capacity to our own fleet to get these units on rent faster. These are the highest return dollars we can deploy.

Rental gross margins were nearly 79% in the quarter, and on-rent yield was over 39%. The trade-off is timing. Levered free cash flow this year will now be slightly positive rather than the more than $50 million we had expected, and most of the earnings from these units arrive in 2027. To size that, at today's rental rates and utilization, roughly $60 million of fleet generates approximately $20 million of annualized revenue and $15 million of annualized adjusted EBITDA. So the incremental units we are adding this year should be a meaningful contributor in 2027 with only a modest contribution in 2026, given delivery timing. Even with that investment, net leverage fell to 3.7 times this quarter, down sequentially from 2Q, and we remain committed to getting below three times in 2027.

Our trucks and equipment continue to power the people who strengthen and build critical infrastructure in the U.S. and Canada. The market has been focused on the durability of demand in T&D and our ability to convert improving rental KPIs into earnings and de-leveraging. We believe our trending results over recent quarters speak directly to that. Bidding activity and ongoing conversations with our customers lead us to believe that these conditions will persist into the fourth quarter and beyond. Our STEM segment had a solid quarter. With strong order flow, third quarter orders were up 22% year-over-year, even as third-party deliveries were affected by timing. For 3Q, overall STEM revenue was up more than 8%, while third-party revenue, excluding sales to our SER segment, was down 5% versus 3Q of 2025.

Third-party revenue in the quarter was impacted by our strategic decision to prioritize additional investment in the rental fleet to take advantage of current and anticipated rental demand. As we noted in August, certain third-party new equipment sales were delivered in the second quarter rather than in the second half, which also weighs on the third-quarter comparison. Additionally, STEM saw more than $20 million of delayed new equipment sales in Q3, resulting from a chassis vendor recall, as well as the need to repair damage to some of our vehicle inventory from a hailstorm at our Kansas City facility during the quarter. Excluding these delayed deliveries, STEM third-party revenue would've been up year-over-year. We believe these are short-term timing issues and that these sales will be recognized in the fourth quarter.

We continue to have a high degree of confidence in our STEM business and are affirming our STEM revenue guidance for 2026. New sales order backlog ended the third quarter at $342 million, up $19 million from the end of Q2 and up 22% year-over-year. Intra-quarter order flow remained strong in Q3 and our backlog has grown so far in Q4. We continue to see strong sales demand in the utility end-market focused on both transmission and distribution equipment. In the infrastructure end-market, we have seen less growth. However, third-quarter orders grew strongly in several categories, and together with our ongoing conversations with our customers and the pace of bidding activity, this gives us the confidence to expect another year of growth in third-party customer revenue for STEM.

With respect to the EPA 27 NOx emission regulations, little has changed since the EPA introduced its proposed changes to the rules in early July. Given our current inventory position, the chassis pre-buy actions we have already taken, and our strong relationships with our chassis OEM partners, we continue to believe that STEM is well-positioned to navigate the impact of the upcoming emissions standards changes. Given our strong year-to-date performance, robust conditions in the T&D end markets, and our outlook for the rest of the year, we are raising our full year 2026 consolidated adjusted EBITDA guidance for the third time this year and now expect a range of $447.5 million to $460 million. We are also raising our SER segment revenue guidance to $870 million to $890 million and are affirming our previous consolidated revenue guidance in the range of $2.1 billion to $2.2 billion.

Long-term sustained end-market demand buoyed by secular mega trends, combined with our ability to provide exceptional execution on behalf of our customers, sets us apart from our competition. Our longstanding relationships with our strategic suppliers and customers continue to be the keys to our success. I continue to have the highest degree of confidence in the Custom Truck team and want to thank everyone for their hard work and dedication that helped deliver our strong results in the third quarter. We look forward to updating everyone soon. With that, I'll turn it over to Chris to walk through the numbers in more detail.

Thanks, Ryan, and good morning, everyone. I will start with consolidated results for the quarter, then discuss segment performance, our balance sheet liquidity and leverage, and finally, our updated 2026 outlook. Our third quarter 2026 results reflect strong operating performance across the business and record rental fundamentals, particularly in our T&D end markets. For the third quarter, total revenue was $495 million and adjusted EBITDA was $111 million, representing 3% and 16% growth, respectively, versus Q3 2025. Adjusted EBITDA margin was 22.4%, up roughly 250 basis points year-over-year and our fourth consecutive quarter above 20%. On a GAAP basis, third quarter net income was over $2 million, or one cent per diluted share, compared with a net loss of just under $6 million a year ago.

Year-to-date, net income is almost $9 million versus a net loss of just under $52 million in the same period last year. About $11 million of that year-over-year improvement reflects a favorable income tax swing, a $2 million benefit this year, which includes a discrete benefit from a reduction in our valuation allowance, versus roughly $9 million of tax expense in the prior year period. The balance was driven by higher operating income and lower interest expense. Turning to our segments, SER delivered record results in Q3, with total revenue of $223 million, up 18% versus Q3 2025, driven by strong double-digit growth in both rental revenue and rental equipment sales activity. Rental revenue of $153 million grew 20% year-over-year, and rental equipment sales grew 14%. RPO activity in Q3 remained strong, highlighting the continued robust demand for our equipment.